Friday, December 23, 2016

Thomas Schelling insight of the day

The U.S. stationed a small garrison in Berlin, which was embedded deep in East German territory, and indefensible against any serious attack. As Schelling described it, these soldiers’ job was not to defend the city but to die if it were attacked. This would then trigger a large scale U.S. response, since no U.S. president could tolerate the USSR killing American soldiers and not retaliate. Hence, by the logic of credible threats, the USSR would not attack Berlin, since it knew that the U.S. would have to punish it harshly, since it had effectively bound itself to deliver on the implied threat. Similarly, Schelling argued that the loss of thousands of American soldiers in the Korean War was a small price to pay if it preserved the U.S. reputation for resolve.

This explanation of Schelling's chessboard experiment, one of my favourite economic concepts, is brilliant. A DIY version here. The exposition of such counter-intuition is a genius at work!